9 Key Things You Must Know To Get Your Small Business Loan Approved

Very few businesses can last long enough without access to any form of credit, at a point in their lifetime. For those that have already taken a loan before, you probably know that the first loan is the hardest to get. When getting a business loan approved, there are many steps to follow and tips to keep in mind. 

Most bankers prefer dealing with borrowers with credit history, i.e. that have already borrowed at least once in their life, and have at least paid back in full, and on time.

Remember that bankers do not venture capitalists who can make riskier investments. They are also not like angel investors, who invest for a cause other than making money. On the contrary, banks prefer lending to the low risk, low-profit ventures, instead of businesses with no record, businesses at the verge of bankruptcy, or high-risk startups altogether.

Banks tend to allude to risk factors as well as increased costs of servicing the small accounts as the primary reason for limiting their exposure to small businesses.

Nonetheless, it can still be done. Here are 5 ways through which you can improve your chances of obtaining a bank loan:

Getting a Business Loan Approved

How to Increase Your Chances of Getting a Business Loan

1- Get a bank that’s Familiar with your Industry

As part of their businesses, banks need to make loans. This is the main reason why they stay in business in the first place. But to increase your chances of success, you need to look for a bank that has done business with companies like yours, or is at least familiar with your industry. It’s also better to seek out banks that are active in financing small businesses.

Keep in mind that some banks participate in government programs, such as SBA loans with guarantees and other loans, while other banks just lend via the conventional basis, where they lend without any form of government support.

2- Know the Common Loan Terminology

Knowing exactly what you’re looking for and the types of loans offered by your bank can help you make a better choice. If you’re familiar with the lingo, you’ll also be able to better understand when getting a business loan in the future.

Terms Loans:

Banks can offer loans ranging from $10,000 to $500,000 to finance the purchase of equipment, inventory, and other large ticket items. Such loans can be either secured with fixed rates, or unsecured with variable rates.

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Commercial Real Estate Mortgage:

these are loans secured by real estate and can be used to refinance, improve, or purchase an investment or commercial property. The loan amounts can range from anywhere between $25,000 to over $500,000

Secured Loans:

banks essentially provide loans for various purposes, including refinancing debt, improving cash flow, of financing the account receivables. In general, secured loans are easier to get, and some banks usually have fixed-rate financing on these loans.

Nonetheless, secured loans are mostly offered to established businesses that have full financial documentation for at least 2 years. There is also the option of unsecured small business loans. These loans are supported by the business’s own creditworthiness, rather than a loan against collateral. They are also known as personal loans or signature loans.

SBA-Guaranteed Loans:

If you don’t qualify for standard loans, you don’t have to worry. SBA loans are ideal for small businesses and have been guaranteed by the federal government.

Vehicle Loans:

For those planning to purchase a vehicle for their business, banks can provide vehicle loans of up to 100% of the total purchase price of a  used or new vehicle.

Lines of Credit:

Some banks can provide business credit for overdraft protection, which is a line of credit that ideally protects a business from checking its account up to a certain limit. Other banks can also offer credit cards for business.

Consult your banker and have them explain to you in detail about the various loan products they have for small businesses. Evaluate their products to determine which one is right for you, keeping in mind which ones are more likely to be approved.

Remember that banks typically require evidence that you can repay the loan, including assets or collateral requirements deposited in that bank.

3- Always be Prepared

An entrepreneur is just like a boy scout; both are always prepared. As an entrepreneur, you should be more prepared when meeting your banker than a boy scout is in the woods.

Show your banker that the loan is a low-risk proposition on your side, and have with you a completed loan application, financial statements projection of about 3 years, copies of cash flows, and a cover letter; plus an executive summary of the business plan.

4- Find out your Credit Score

One of the first things the lender will look at as they review a loan application is the credit scores of the applicant. It’s therefore crucial to know your score. FICO scores typically range from 300 to 850, and it can be a challenge for a business with scores less than 600 to obtain business credit from any financial institution. Make sure you’re on top of your credit at all times, especially in the months leading up to your application. It can be easy to fall off the rails if you don’t monitor it closely. 

5- Anticipate Tough Questions

Do you remember how you prepped for a job interview? In most cases, the interviewer probably never asked the questions you were dreading most. Instead, they caught you off guard and asked you something you hadn’t thought of.

Loan applications can be similar to this in many respects. As such, be prepared to answer the truly tough, and aim to create the best impression. One study suggests that a thoroughly prepared and confident borrower will be 4 times more likely to have their loan approved compared to a borrower who doesn’t know the answer.

Be prepared to address questions like:

How much money do you need? In such a question, be as precise as possible. Of course, adding a few bucks extra for contingencies won’t hurt. How long will you need the money? Be ready to give a detailed explanation of how the money will be used, and why they should go with your idea.

What are you going to do with it? In most cases, businesses use loans to pay off old debts, buy new assets, or pay for some operating expenses. How long will you take to repay it? Preparing detailed cash flow projections can offer a concrete repayment period.

Try to convince the lender of the long term profitability of your business, as well as your ability to repay their loan with a business plan and cash flow projections.

What will you use as collateral? Collateral is crucial when it comes to business lending, and you need to be aware of what a collateral package looks like. Keep in mind that without collateral, the lender will solely rely on your existing cash flow and future performance in repaying the debt. This can translate into higher interest rates due to the higher risk.

6- Dress Professionally

Although this might come as a no brainer, some entrepreneurs tend to dress the way they wish, perhaps part of the reason being they are their own bosses. 

This can be fine for the young tech executives who like to slouch around in flip-flops, hoodies, and rugged jeans. However, it won’t be good for a startup business meeting with a banker. You need to project the image of a professional that’s sober, and trustworthy; one that can be trusted with a loan. Check this article on the men’s style guide for a reference.

7- Avoid Overstretching the Truth

Avoid using unsubstantiated, broad statements. Most lenders will easily check and find facts about your business. As such, if you can’t support any of your statements, simply don’t make them. Ensure that you can support everything you say with facts and figures. It’ll be best to keep any projections, collateral statements, and assets list soles on the conversation side.

8- Know the State Laws

A lot of the time, the laws and procedures will vary by state depending on the type of loan you’re seeking. Make sure that you know what you’re getting into before you dive in! Read up on certain information regarding getting a business loan in your state. Perhaps there are a few things on this list that you won’t need, or some other aspects that you’ll need to dream up in order to get that loan. 

When going into the application process, it’s a good look when you know your stuff. Potential loaners will want to know that the person they are giving money to is dependable and on top of things. 

9- Produce a Robust Application

The last tip is pretty straightforward—when you’re filling out the actual application, make sure everything is filled in completely. Ensure that each section stands out, is honest, and has been edited thoroughly. After all, the first thing people see is your application, so you’ll need to know that it’s up to standard. 

Once you’ve made sure that there are no further edits you can make on your application, submit it in a timely fashion. After that, you can get to the preparation stage without hiccups.

The Bottom Line:

Getting a business loan is tricky and a bit difficult, especially for new entrepreneurs, however, thorough research and planning according to the tips above can make it easy.

If you have any questions or comments regarding our tips, let us know in the comment section below! We wish you the best of luck in getting a business loan. Thanks for reading, and we’ll see you next week!